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E.I. (Fach) / Essential economics of preferential liberalization (Lektion)

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• The PTA-Diagram: assumptions No increasing returns to scale Perfect competition But: No small country assumption which allows tracking effects on third countries
• The PTA Diagram: Ablauf MSPTA zwischen MS und MSMFN RoW does not export until dom. price rices above Pa dom. price falls from P' to P'' Partner's border price rises from P'-T to P'' RoW's border prcie falls from P'-T to P''-T RoW's exports fall Partner's exports rise more than RoW exports fall (supply switching)     -> domestic importan rise
• Welfare effects of PTA HOME's net change: A+B-C        -> tariff revenue T*M: Erst A1+B1+C, danach nur XRoW*T=B1+B Border price effect: How much more (or less) Does HOME pay for the goods before PTA: amount of XRoW (price for good fell): HOME gains XRoW*[(P'-T)*(P''-T)]=B amount of XPart=M''-XRoW (price rose) HOME loses C Partner's net change: +D (sells more to a higher price: pos. border pr.&trade volume effect) RoW's net change: -E (sells less to a lower price: Neg. Border pr.&trade volume effect)
• Welfare effects of a Custom Union In Market for Good 1: Home change: A+B-C1-C2: (C1+C2 is loss because the tariff raised the price it paid for imports from Partner (P'-T to P'') ); C1: how much HOME pays for units it continues to import (M'-X'P) [exactly what gains Partner] -> just transfer between CU HOME's loss of imports of G1 is offset by gain of D1=C1 on its exports of G2 C2: direct costs of supply switching: X'P-X''RoW (amount of s.s.)*(P'-T to P'') [not compensated by exports] In Market for Good 2: Home change: +D1+D2 -> Net HOME impact: A+B-C2 (Partner impact identical)
• Fictional barriere Preferential Trade Liberalisation G1: HOME change: A+F G2: HOME change: D ->Net impact: A+F+D    (Partner gains the same, RoW loses)
• FTA vs. CU FTA is like CU but have no Common External Tariff (CET) opens door for "tariff cheats": goods from RoW destinied for HOME market enter via Partner if Parnter has lower external tariff, called trade deflection solution: "rules of origin" (only duty-free for goods made in Partner)   -> difficult & expensive to administer and rules often become vehicle for disguised protection BUT CU requires some political integration: must agree on CET and how to change it, including anti-dumping duties, etc.
• WTO Rules basic principle of WTO and GATT (General Agreement on Tariffs and Trade): non-discrimination in trade policy, i.e. MFN FTA & CU are allowed: Art. 24 conditions: must completely eliminate tariffs on "substantially all the trade" among members (-> cannot pick & choose products) Intra-bloc tariffs must go to to zero within reasonable period CU: CET must not be higher than before      (In EEC's CU: France and Italy lowered tariffs, Benelux nation raised theirs)

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